By Hon. C. Raymond Radigan and Adam J. Gottlieb, Esq.
The Surrogate’s Courts hold generally that fiduciaries are appointed for the purposes of making decisions for which they are compensated, and Surrogates should not be called upon to make fiduciary decisions.
History of SCPA §2107
Prior to 1993, SCPA 2107 had two subdivisions. The first dealt with the right of a fiduciary to seek advice and direction whenever the value of property of an estate was uncertain or dependent upon the time and manner of sale. The court authorization, if granted, aided the fiduciary to establish the propriety, price, manner and time of sale of property. The second subdivision provided that substantial compliance with such authorization would relieve the fiduciary from any objection that the estate might suffer by way of loss due to the action of the fiduciary in following the Court’s advice and direction. Over the years, fiduciaries sought to expand the use of the statute beyond what is literally contained within the specific language of the statute, and they sometimes succeeded. See Turano’s McKinney’s Practice Commentary, SCPA 2107.
The Advisory Committee to the Legislature on EPTL and SCPA reviewed the numerous instances where the Surrogates gave advice and direction and recommended the statute be broadened to encompass what the Surrogates were permitting. The Legislature added a new subdivision under L.1993, c. 514, Section 51, which provides that the Surrogates may entertain applications by a fiduciary for advice and direction “in other extraordinary circumstances, such as complex valuation issues, or tax elections, or where there is a conflict among interested parties.” However, the Court need not entertain such relief if to do so would be merely to substitute the Court’s judgment for that of the fiduciary. Accordingly, the Court would continue to adhere to the general policy that advice and direction is not liberally granted and that Surrogates would continue to refuse to make business judgments for which a fiduciary is entrusted, but may give advice and direction beyond what was literally provided for under the prior statute. (See Matter of Langfur, NYLJ, 2/23/1994, p. 26, col. 1, (Surrogate Nassau). If a fiduciary obtains relief sought under SCPA 2107 and complies with the Court’s authorization, he would not be liable for the losses resulting therefrom.
Had it not been for the Surrogates’ expanded interpretation of the statute, there would have been even less instances where the statute could have been utilized.
While real estate transactions are specifically noted in the first subdivision of SCPA 2107, it is the non-real estate issues which may require much more analysis in order for the Court to decide whether to grant a petitioner’s request for advice and direction. These non-real estate issues often invoke subdivision two of SCPA 2107 and can be entertained only in extraordinary circumstances, such as complex valuation issues, or tax elections, or where there is conflict among interested parties. Generally, the handling of an estate entails making business judgments by a fiduciary. Therefore there must be a demonstration that conditions of an estate are so unusual that it would not be safe or proper for the fiduciary to proceed in the ordinary business way Warren’s Heaton, Section 67.10.
When a fiduciary seeks advice as to whether the trustee as a stockholder should vote in favor of a particular proposal, such as obtaining or extending a mortgage or leasing property, a trustee would become a mere ministerial agent making the court the determiner of a business judgment in place of the fiduciary, and unless there are extraordinary circumstances, the application must be rejected. In re Ebbets, 139 Misc. 250, 248 N.Y.S. 179 (Kings Surr. 1931).
Advice and direction is not liberally granted, especially where fiduciaries breach the fiduciary duty and his or her negligence may be remedied by a surcharge. It is only in extraordinary circumstances where a fiduciary should not be the one to make a determination that the Courts should exercise its power to give advice and direction. In re Osterndorf, 75 Misc.2d 730, 349 N.Y.S.2d 275 (Nassau Surr. 1973); Matter of Lovell, 23 A.D.3d 386, 808 N.Y.S.2d 227 (2d Dept. 2005).
Notwithstanding the list of circumstances found in the statute, in cases in which a breach of fiduciary duty is contemplated, and the Court has addressed advice and direction, the fiduciary may get some guidance. See Estate of Edward H. Dahly; 10/15/98 NYLJ 29, (col. 2) (New York Surr.), Matter of Louis Feil, 10/9/2001 NYLJ 28, (col. 1) (Nassau Surr.); Matter of Shurtleff, 206 Misc. 255 (N.Y. Co. Surr. 1954), appeal dismissed, 285 A.D. 988. In Matter of Shurtleff, while the fiduciary did not seek advice and direction, the Court raised the point that the executrix breached her fiduciary duty and did not seek advice and direction, and was surcharged for the damage caused by that breach, without granting advice and direction under SCPA 2107.
The statute may be used when an issue arises concerning the fiduciary self-dealing, such as when a fiduciary has an option to buy shares of the decedent’s interest in a closely held corporation and the beneficiaries object. In re Dahly, supra. An example of extraordinary circumstances is where an executor questioned whether he could sell real property to a limited liability company of which his children were owners. Since the real property was to be funded into charitable testamentary trusts, court approval was necessary since self-dealing was involved and could have jeopardized the charitable deduction. In re Feil, supra.
In most other cases with a breach of duty, it is the fiduciary’s actions with regard to his duty of loyalty that puts the fiduciary in Surrogate’s Court. His duty of loyalty, coupled with his self dealing, in particular, can cause the fiduciary to seek advice and direction from the Court. See Matter of Abdella, 102 A.D.2d 921 (2d Dept. 1964), Matter of Lovell, supra; Matter of Weinstein, 25 A.D.2d 776, appeal dismissed, 19 N.Y.2d 599.
Even in these cases of self-dealing and the fiduciary’s petition for advice and direction, the Surrogates do not liberally grant the remedy of advice and direction. The judicious use of the remedy leaves some fiduciaries without direction and often with the imposition of a surcharge.
If the court makes a business judgment and the fiduciary acts accordingly, the court will be precluded from surcharging the fiduciary in a contested accounting proceeding. Very often fiduciaries bring on advice and direction proceedings knowing the likelihood of the court’s refusal to grant the relief. However, the attempt under proper circumstances should nonetheless be made to ensure that the fiduciary does have the power to make the judgment. Generally, if the fiduciary doesn’t have the power, the court would indicate that in its determination otherwise the fiduciary must decide whether to act. However, if the court declines to give relief stating that it is the fiduciary who should make the business judgment, the good faith effort seeking court approval, even if rejected, may prove that the fiduciary was prudent in making its ultimate decision and may thereby avoid a surcharge.
If a fiduciary knows his or her judgment is going to be challenged by those interested, as a precaution it would be wise to seek advice and direction even if the fiduciary anticipates the court’s rejection as the proceeding will flush out if there is going to be a challenge and the fiduciary will be in a better position in evaluating what course to follow. As indicated bringing on the proceeding may indicate good faith and the fact that the fiduciary utilized all that was available in ultimately making a decision. A rejection of advice and direction also may establish justification for the fiduciary not doing a particular thing, possibly obviating a later objection of his or her not making a particular judgment call.
So a fiduciary is denied the remedy of advice and direction. Now what? From that denial, the fiduciary can proceed with a transaction which was contemplated, as long as it is proper and discharges his fiduciary duties. In the above cases where the fiduciary was surcharged, the fiduciary presumably was ordered to repay certain monies to rebuild the trust or estate so that he may, from that point forward, proceed with his fiduciary business with or without advice and direction from the Court. He should act within his fiduciary power, which is often described in those cases where the Court denies his application, giving him some instruction, albeit informal.
One thing is clear, the circumstances must be extraordinary. The Courts will not substitute their judgment for that of the fiduciary’s. So be they self-dealing, or breach of other fiduciary duties, the Court reviews the circumstances and may leave the fiduciary with the final decision.